Australia | Oct 29 2009
By Chris Shaw
Shares in integrated waste management company Tox Free Solutions ((TOX)) have risen along with the broader market this year with the stock having run from levels around $1.20 per share in January to a current price of about $2.60, but in the view of Intersuisse there remains further upside in the share price as the earnings growth outlook remains strong.
Not only is the integrated waste treatment facility at Kwinana performing well, but the Port Headland industrial waste incinerator continues to meet expectations, while Intersuisse also notes the recent acquition of Barry Brothers offers a further growth platform. The acquisition moves the company into the sewer and high pressure water cleaning and waste water recycling and reclamation sectors of the market. As well, it adds sites in Queensland, New South Wales, Victoria and South Australia from which Tox Free can expand its operations.
Evidence of success with respect to expansion plans have also come from new contracts, Intersuisse noting a waste management services deal with Toll Holdings and a waste treatment and disposal contract for the Gorgon Project on Barrow Island have also recently been signed.
From an earnings perspective there is also scope for improved efficiencies stemming from a new national management structure recently put in place and stronger volumes from new contracts, geographical expansion and further acquisitions. Intersuisse expects the company to be able to fund any such acquisitions as while debt to equity stands at around 61% currently, operating cash flow has strengthened on the back of the Barry Brothers deal and interest cover remains healthy.
On Intersuisse’s numbers Tox Free is poised to deliver strong earnings growth in coming years as its earnings per share (EPS) forecasts stand at 14.7c for FY10 and 18.2c for FY11, which compares to the 10.3c earned in FY09. This leaves the broker looking conservative with its forecasts given JP Morgan, one of the few brokers in the FNArena database to cover the stock, is forecasting EPS of 16.5c in FY10 and 20.7c in FY11.
According to an update today by JP Morgan, AGM comments from management give confidence full year earnings expectations will be met and support its view long-term earnings growth potential remains high. But at a FY10 earnings multiple of 15.7x the stock is trading at a 34% premium to the average of the JP Morgan coverage universe and so the stockbroker struggles to see value at current levels.
Assuming Intersuisse’s numbers prove close to the mark this earnings multiple would come down to around 14.3 times in FY11 and this is seen as more than reasonable given the combination of revenue and profit growth on offer. To reflect this, Intersuisse recommends investors continue to buy the stock, though both JP Morgan and UBS, the other broker in the database to cover Tox Free, rate the shares as Neutral at current levels.
Shares in Tox Free today are weaker and as at 12.50pm the stock was 6c lower at $2.52, which compares to an average price target according to the FNArena database of $2.25. Over the past year the stock has traded in a range of $1.02 to $2.71.
